EXC

Exelon Corp. Q1 2005 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2005, for Exelon Corporation and its subsidiaries: Commonwealth Edison Company (ComEd), PECO Energy Company (PECO), and Exelon Generation Company, LLC (Generation). Exelon operates in two primary segments: Energy Delivery (regulated retail electricity and gas sales via ComEd and PECO) and Generation (wholesale power generation and marketing). The filing notes that Exelon Enterprises was wound down in 2004 and is no longer reported as a segment.

Key Financial Metrics

Note: Operating cash flow for Q1 2005 was significantly negative due to a $2 billion discretionary pension contribution funded by a term loan.

Material Changes vs. Prior Period

• Net Income Increase: Net income rose 26% to $521 million, driven primarily by a $233 million increase in Generation's net income and a reduction in losses from discontinued operations.
• Generation Performance: Generation's net income surged from $71 million to $304 million. This was due to favorable mark-to-market adjustments on energy derivatives, higher revenues from the amended Power Purchase Agreement (PPA) with ComEd, and a $21 million pre-tax gain on the sale of Sithe Energies, Inc.
• Energy Delivery Decline: Net income for the Energy Delivery segment (ComEd and PECO) decreased by $117 million to $198 million. This was caused by higher purchased power costs under the new ComEd PPA, partially offset by lower interest expenses from debt retirements.
• Discontinued Operations: The company recorded a $14 million income from discontinued operations in Q1 2005, compared to a $17 million loss in Q1 2004, following the sale of Sithe and the wind-down of Enterprises.

Outlook, Risks, and Management Commentary

• Proposed Merger: Exelon is pursuing a merger with Public Service Enterprise Group (PSEG). Regulatory filings have been made with the FERC, DOJ, and various state commissions. Approximately 50 intervenors have objected to the merger at the FERC level.
• Pension Funding: Exelon made a $2 billion discretionary contribution to its pension plans in Q1 2005, funded by a $2 billion term loan. This action significantly impacted operating cash flow but reduced future pension obligations.
• Regulatory Risks (SECA): The elimination of "Through and Out" (T&O) transmission rates and the implementation of Seams Elimination Charge/Adjustment (SECA) rates create uncertainty. ComEd may see reduced collections, while PECO may become a net payer. These amounts are subject to refund and appeal.
• Synthetic Fuel Tax Credits: Exelon's net income includes benefits from synthetic fuel investments. These tax credits are subject to phase-out if domestic crude oil prices remain high. A complete phase-out could result in an estimated $70 million after-tax non-operating loss.
• Derivative Exposure: Generation holds significant energy derivative positions. While mark-to-market gains boosted Q1 earnings, management notes these are expected to reverse largely by the end of 2005.

Investor Verification Checklist

• Pension Loan Repayment: Verify the timeline and source of funds for repaying the $2 billion term loan used for pension contributions, as this impacts future liquidity.
• Merger Approval Status: Monitor the progress of regulatory approvals for the PSEG merger, specifically FERC hearings and shareholder votes.
• SECA Rate Outcome: Track the resolution of FERC appeals regarding SECA rates to assess potential refunds or additional charges for ComEd and PECO.
• Derivative Reversal: Watch for the reversal of Q1 2005 mark-to-market gains in subsequent quarters, which could materially impact Generation's earnings.
• Oil Price Sensitivity: Monitor crude oil prices to evaluate the risk of synthetic fuel tax credit phase-outs and potential impairment of related intangible assets.